Efficiency Wages

This overview of the principal efficiency wage models presents new results in the field. It provides models of competitive labour markets in which wages have sorting, incentive and nutritional effects. It shows how these effects can cause unemployment, a misallocation of labour and equilibrium wage distributions. Results are derived with the use of simple mathematics, motivated by economic intuition and numerical examples. Other models in which wages affect productivity are also discussed. The book is divided into two parts. Part 1 is concerned with the sorting effects of wages, or more generally wage schedules, in an economy where workers have information about their own productivity that is not available to firms. Part 2 is concerned with the direct effects of wages and wage schedules on the performance of workers, assuming that workers have private information about their own productivity.